7 Stocks to Buy From One of America’s Best Pension Funds

All seven of these stocks are $100 million positions or higher

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I come across good stocks to buy in all sorts of places. Recently, I read about the Wisconsin Retirement System, the eighth largest public pension fund in the U.S. and the 25th largest public or private pension fund in the world.

“Wisconsin by the numbers is among the five best funded systems in the country, but what sets it apart even further is just how thoughtful the state has been on paying what has come due, and in laying out policies that plan for the future,” said Greg Mennis, who is the director of public sector retirement systems project at the Pew Charitable Trusts.In that regard, it’s as good as it gets for a state-run public pension system.”

So, who would you want to look to for investment ideas? One of the best pension funds in the world or from one that’s not able to meet its obligations?

Using careful planning and a commitment to meeting its obligations, Wisconsin’s been able to create the prototypical pension fund.

Here are seven stocks to buy that represent its top holdings.

Stocks to Buy: Alphabet (GOOGL, GOOG)

Stocks to Buy: Alphabet (GOOGL, GOOG)
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The two things you’ll notice about all of the names on this list is that they’ve been chosen alphabetically and by the size of the holding.

In the case of Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), the State of Wisconsin Investment Board (SWIB) owns $907 million of the company’s stock with $484 million in the Class C shares and $423 million in Class A. This represents about 2.6% of the $35.2 billion in equity investments held by SWIB.

That might not seem like a big bet on the parent of Google, but considering SWIB owns 1,537 securities, 2.6% is plenty. In fact, behind Microsoft (NASDAQ:MSFT) at $1.1 billion, Alphabet is the fund’s second-largest holding.

It’s not that I’m not recommending MSFT, but if you want to know more about why I like Alphabet, read this.

Berkshire Hathaway (BRK.A, BRK.B)

Stocks to Buy: Berkshire Hathaway (BRK.A, BRK.B)
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Holding close to $300 million in Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), I haven’t calculated where Warren Buffett’s company stands in SWIB’s $35-billion portfolio. I’d guess it’s in the latter half of the pension fund’s top 10 holdings. If not, it’s easily in the top 25.

It would be interesting to see how closely SWIB’s holdings track the major indexes. But that’s a story for another day.

Berkshire Hathaway continues to attract detractors despite its long-term track record.

Canada’s Globe and Mail recently ran a story about Keefe, Bruyette & Woods analyst Meyer Shields, who has covered Berkshire for 10 years and has never considered it a buy.

“By analyzing the company’s reported month-end holdings over the past 20 years, Mr. Shields generated an approximate performance history for Berkshire’s equity portfolio, which holds more than US$200-billion in stocks,” The Globe’s Tim Shufelt wrote May 20. “In the 10 years up to the end of 2009, Mr. Buffett’s portfolio outperformed the S&P 500 index by a remarkable 119 per cent. Since then, however, the S&P 500 has come out slightly on top.”

What the analyst fails to mention is that Berkshire’s equity portfolio generates more than $3.8 billion in dividends annually, money that can be used to buy back its stock. In 2018, Berkshire bought back $1.3 billion of its stock. Buffett would have to spend three times that amount to meet its cash flow from its equity portfolio.

From where I sit, that’s a desirable proposition if you’re a BRK shareholder.  

Costco (COST)

Stocks to Buy: Costco (COST)
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I live in Canada, where Costco (NASDAQ:COST) is even more popular than in the U.S.

One of the reasons this is the case is Costco doesn’t have a competitor here like Sam’s Club to take market share. Add to this the reality that our standard of living is slightly lower than in the U.S. and Costco can’t help but attract price-sensitive Canadians to the deals it provides.

I should know. When my wife and I moved out to Halifax from Toronto in February 2018, we got new home and auto insurance through Costco. Even with a 10% increase for 2019, it’s still a lot cheaper than what we were paying in Toronto.

SWIB only holds $117 million of Costco stock, but that likely has less to do with not liking the discount retailer and more to do with an overall negative sentiment surrounding the retail industry.

Where does Costco turn for growth?

E-commerce, naturally. In February, Costco emerged as the favorite e-commerce company based on the annual American Customer Satisfaction Index. In Costco’s latest quarter its e-commerce sales increased by 25.5% on an adjusted basis, proving naysayers wrong that it couldn’t win in the online game.

Costco’s business model is simply one of the best in retail.

Disney (DIS)

Disney (NYSE:DIS) CEO Bob Iger is in the middle of a transformation that will make it far more competitive in the TV marketplace than it has been in the past, adding three streaming services to the fold: ESPN+, Hulu and Disney+, the last of which will launch later in 2019.

Five years ago, it didn’t have any. Now it’s got three. If you’re a cord cutter, Disney’s got to be at the top of your list.

How’s that?

Disney+ provides the family content necessary to be successful in a country with so many young children. Hulu gives viewers edgier, broader content, and of course, ESPN+ helps sports lovers with their addiction.

It’s a mighty trifecta of growth that didn’t exist in 2017. And then, of course, there are all the other Disney divisions generating plenty of goodwill with consumers around the globe.

I’m not going to say much else other than Disney is one of the top three entertainment stocks in the U.S. because of its diversification into streaming. Without it, it would still be a great group of businesses. With it, it’s an 800-pound gorilla.

Perhaps that’s why SWIB owns $228 million of its stock.

Gilead Sciences (GILD)

Stocks to Buy: Gilead Sciences (GILD)
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Of the seven stocks to buy listed in this article, Gilead Sciences (NASDAQ:GILD) is SWIB’s smallest holding at $103 million.

In 2018, Gilead generated $7.5 billion in free cash flow, which accounted for 34% of its overall revenue. Historically, that’s not the best performance from Gilead when it comes to converting sales to free cash flow, but it’s still pretty darn good.  

If there’s one thing I tend to look for in a business, it is strong free cash flow generation. It’s a sign of healthy finances. Gilead’s got it in abundance.

Why the relatively little exposure? The company’s facing a lot of bad PR on its Truvada HIV prevention drug.

Individually, Truvada costs $6 per month to make. It sells the drug for up to $2,000 per month, which explains why the company’s free cash flow is so healthy.

For the same cost the American health-care system currently spends on Truvada alone, we could provide free generic drugs and clinical care to all 1.2 million Americans who need PrEP and still have half a billion dollars left over to pay for support services including transportation, counseling and housing,” stated a May 21 opinion piece in The Hill.

Clearly, SWIB is hedging its bet on GILD, or you could be sure the weighting would be much higher.

I wouldn’t invest in it, but that doesn’t mean you shouldn’t.

Home Depot (HD)

Stocks to Buy: Home Depot (HD)
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Depending on which media outlet you turn to, Home Depot’s (NYSE:HD) Q1 2019 results were either excellent, mediocre or disappointing.

Canada’s Financial Post ran the headline “Home Depot posts strong profit, revenue,” on May 21.

Yahoo Finance ran the headline “Home Depot earnings beat, same-store sales misses,” on May 21.

Finally, Benzinga’s headline read “Home Depot Analyst Says Renovation Cycle May Be ‘Petering Out.’”

Unless I’m mistaken, HD stock is SWIB’s largest retail position at $273 million. Given 13-F holdings reports are historical accounts of a portfolio and not a real-time picture, almost two months have passed since investment manager filed its Q1 2019 report, so it’s impossible to know if it still feels as strongly about the home improvement retailer.

I guess we’ll find out in early August when it files the second-quarter report.

Neil Saunders, managing director of GlobalData Retail, had this to say about Q1 2019:

“The consumer economy was also more unfavorable than last year, when tax cuts, good tax refunds and generally high confidence were all boosting spend. While shoppers are far from being in the doldrums, the prevailing attitude now is more cautious and careful.”

While same-store sales grew by 2.5% in the first quarter, short of the consensus estimate of 4.2%, both the top- and bottom-line beat analyst expectations during the quarter.

Come summer, look for Home Depot to deliver better same-store sales growth.

As retailers go, HD stock is one of the best.

iShares Core MSCI Emerging Markets ETF (IEMG)

Stocks to Buy: iShares Core MSCI Emerging Markets ETF (IEMG)SWIB, like any investment manager worth its salt, has some exposure to emerging markets.

To get exposure, it’s invested $244 million in the iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG), an ETF that tracks the performance of the MSCI Emerging Markets Investable Market Index.   

Charging 0.14% annually, SWIB’s paying less than $342,000 (0.14% MER) in fees for this position. If it’s good enough for a large investment manager, it ought to be perfectly acceptable to the regular investor.

If you’re a DIY investor, you can figure out how much you want to invest outside the U.S. for both developed and emerging markets, and then focus on U.S. companies for buying individual stocks.

While it’s gotten knocked around in the first five months of 2019 thanks to the U.S./China trade war, it is still up 3.6% through May 21.

China, South Korea, Taiwan, and India account for 65% of the fund’s $56.3 billion in total net assets. Four sectors have weightings of more than 10%: Financials (23.2%), IT (14.3%), Consumer Discretionary (13.3%), and Communication (11.2%).

Add to this the iShares Core MSCI EAFE ETF (NYSEARCA:IEFA), which focuses on developed markets outside the U.S. and Canada, and you’re good to go.      

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


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